This blog is devoted exclusively to American jobs and America's labor markets

Friday, October 14, 2011

Job Training and Public Policy

Free traders, privatizers and devoted deregulators everywhere know job losses in manufacturing make up bad news, which is why they forecast new investment and expansion into sectors with higher productivity and more jobs for the future. They talk vaguely of new high tech jobs, always careful to mention computers and computer technology. They warn these new jobs take college degrees and so they advise, “Get some training.”

Holding out training and education as the path to better jobs shifts the responsibility for failure, or a menial job with low pay, on to the individual and away from business and government policy. Alan Greenspan, the former Federal Reserve Chairman, was very cleaver doing that. When he would testify on Capital Hill an inquiring committee member would ask why America has so many low paid jobs. He would answer people need to get some training so they are ready for today’s new high tech jobs. Today’s jobs require high skills, he would say. In other words, people could have better jobs if they would only take the initiative to get that training; Mr. Greenspan cannot be held to blame.

Committee members would usually stop their questions following his “Get some training” answer. After all making college pay depends on a financial return, which requires complicated calculations. The need for calculating compound interest gives the impression that investment returns are precise and use only one procedure. However, there are different procedures, even though the actual arithmetic is always precise.

Economists, for example, like to include time in college as time away from work. If time in college is time away from work then lost or foregone wages as well as tuition payments will be a cost of college and included in calculations. Those less devoted to the economist’s way might wonder why time in college is time away from work. Many go to college and work. The time in college might come from leisure or free time instead of work. The matter is in doubt and depends partly on preference.

Despite the need for choice in computing educational returns a common procedure compares interest adjusted wage differences over time with interest adjusted tuition and fees over the same time. The process requires interest calculations because money paid for college tuition and expenses could be used to buy stocks and bonds or other interest earning assets. Tuition and expenses amounts to an investment in a higher paying job, even though college students may want to go to college for other reasons. Millions of America’s jobs like cashier need only general workforce skills whereas jobs needing college degree skills like nurse, accountant or teacher earn a higher wage that allows estimating a financial return for the wage difference.

Another method converts college tuition and expenses into an estimate of the minimum salary increase that will make college a paying investment. Suppose in-state tuition at public college is $8,000 per year each year for four years. In some states like North Carolina, the state tuition is reported as $7,008, while in others like Michigan it is $12,634. Some are above, some below $8,000, but we let $8,000 be a representative tuition for 2010. In the first year $8,000 invested in stocks and bonds would earn interest or dividends. Similarly in the second year, except $16,000 would be invested and the second year earns interest or dividends on $16,000. At the end of four years at the time of graduation the principal invested and the interest earned is a total amount, which will equal $36,307.77 at 5 percent interest. Our thanks for the $36,307.77 total go to the built in spreadsheet functions on MS Excel.

Borrowing the tuition does not change the calculation unless interest rates differ between borrowing and investing. To have the college investment pay, a higher income stream from a higher paying job must be equal to, or greater than, monthly earnings on $36,307.77. If we presume the same 5 percent interest rate, then borrowing only changes $36,307.77 of equity investment into $36,307.77 of debt. Either way the college investment amount is $36,307.77 after four years.

The principal amount of $36,307.77 earning 5 percent interest over the next 10 years and compounding monthly will be equal to $59,799.24. Start at graduation and $384.97 of extra income each month over the next 10 years using 5 percent interest will be $59,799.02. The $384.97 equals the minimum extra monthly earnings necessary to pay for a college education at an interest rate of 5 percent. A lower interest rate will lower the amount of necessary earnings; higher interest rate will raise the amount. Using a 2,080 hour year means $4,619.64 a year of extra wage and salary makes college a paying investment. Experiment yourself. Use the Excel help file under FV, which stands for future value. The spreadsheet entries above are =FV(.05/12,120,0,- 36,307.77,1) and =FV(.05/12,120,-384.97,0,0).

Remember that graduation from college for the many who attend college right after high school implies entry into the labor force at age 22. The social security retirement age is 67 years. Congress and the country are expecting 45 years of work. Forty-five years of work means that all the BA graduates since 1965 to the present have not reached retirement age. The total comes to 47.2 million. (1)

The education and skills training necessary to fill America’s occupations varies widely but the Bureau of Labor Statistics developed a skills classification to reflect the current education and training needed for jobs reported within its occupational categories. The BLS categories include occupations that typically require college degree training: baccalaureate degree, masters, doctorate, and professional degree. The term required has a broad use because in some occupations the degree is absolutely necessary to be considered, where in other occupations a college degree is not strictly required but the skills needed for entry are such that candidates without a degree are much less likely to be considered, much less employed.

In 2010, 27.5 million jobs in the U.S. economy needed a BA degree or above for jobs reported from Bureau of Labor Statistics occupational data using the Bureau of Labor Statistics skills classification. Because those with professional, doctorate or masters degree usually have a baccalaureate degree before starting a graduate program, the 47.2 million eligible BA degree holders reported by the National Center for Educational Statistics can be directly compared to 27.5 million jobs that need a BA degree or above. The difference suggests plenty of qualified candidates for America’s jobs that need college degree skills, or conversely that many people with college degrees take jobs that do not need college degree skills.

Making college pay is a financial matter, not a matter of degrees, job title or status. People with college degrees take jobs that do not need college degree skills, but college will pay as long as those with a college degree earn more than a high school graduate in the same job. If college does not pay, it would be necessary to have a college graduate in a high school job and earning no more than high school graduates.

In the present circumstance of jobs, tuition and interest rates, “Get some training” remains good advice, but only for individuals. What works for individuals does not make a public policy applied to the larger society. The number in the labor force with BA degrees keeps going up because new BA degree graduates now exceed 1.5 million a year which is nearly triple the graduates from 45 years ago who are leaving the labor force. More are already attending and finishing college, but jobs needing college degree skills remain stuck under 28 million and continue to be 19 to 22 percent of employment reported in the occupational employment survey.

There is no increase in Americans attending college that will relieve America from low wage jobs and unemployment. Increasing the supply of well trained job applicants does not create the demand to employ them, nor assure them a higher wage to make that training pay. Politicians who want you to “Get some training” give you good personal advice for now, but they are really changing the subject.

Note (1) National Center for Education Statistics, U.S. Dept. of Education